Tuesday, January 05, 2010

Called to Account

Call me a freak, but I like nothing better than pouring myself a beer and rifling through a set of accounts.

When those accounts are those of Charlton Athletic, they hold particular resonance because when one steps away from the passionate and opinionated debate about matters relevant to the club, they represent the only objective and universally available insight.

I urge you to read them here too. Meanwhile my review of the previous year’s accounts can be found here.

On the opening pages, Richard Murray’s statement is refreshingly honest and critical. Mistakes are admitted, particularly those pertaining to manager selection, transfer dealings and loan signings.

The scariest data point in the entire document is contained right there on page 1, notably ”£12.6million of the total £13.6million of the television and broadcast income recorded comes from the parachute payment.”

Given that total revenues for the fiscal year were only £23.5million, more than half of the club’s revenues have since disappeared at a stroke, a truly devastating statistic.

Reflecting this sudden drop in revenues, the most important aspect of the cost base (staff costs) was reduced by 30% but this must surely fall much further.

After all, if promotion is not achieved this season, one must additionally assume further falls too in matchday and commercial revenues.

The operating loss was over £8million (down from £12million) even with the final parachute payment, and this is unsustainable although as discussed below in the short-term cashflow is more relevant than profitability.

The club still employs 160 staff, a figure which intrinsically feels too high to me. If revenues fall to say £12million in the current fiscal year, this implies turnover of only £75,000 per employee.

This compares for example with a retailer like Tesco which produces revenues of £125,000 per employee, and any supermarket shopper knows how useless many of them are.

The accounts remind us of the substantial turnover on the Board in September 2009, with a number of longstanding directors such as Martin Simons and Michael Grade resigning.

Simons earned a £25,000 salary during the year, but it is not specified why he was a special case.

The ability to provide financing (or notably in the case of Peter Varney, the ability to attract financing) has seemingly become the key factor in determining Board representation.

The club’s main assets are its freehold land and buildings, and the ‘intangible’ value of player registrations.

Not surprisingly the value of the latter has fallen substantially as players are offloaded, and as a result the club’s ‘net assets’ are barely positive at £1.4million.

However the asset side of the balance sheet is not particularly useful as a metric (Jonjo Shelvey is not a playing 'asset', yet represents the club's most saleable player).

It is difficult not to be astonished by the negative (£44.6million) figure for the ‘profit and loss account’, equivalent to the total cumulative losses for the club since inception (net of any distributions to shareholders).

Indeed it contrasts with a comment Murray makes in his statement, namely ”….it is important we continue to work hard to secure new investment into the club.”

The dictionary definition of ‘investment’ is ….laying out money or capital in an enterprise with the expectation of a profit.

The club may or may not be successful in attracting capital, but the concept that it would constitute an ‘investment’ in the strictest sense of the word is fanciful.

From Portsmouth to Cardiff, and from Notts County to Stockport, the finances of football clubs are being laid bare.

Indeed as any followers of non-League football will know, the madness does not stop at the gates of the 92 League clubs.

I sense that the collapse (by which I mean the complete disappearance) of a relatively major club would be the best thing that could happen to football, but one just hopes it doesn’t happen to be ours.

It would render credible to every club in the land the threat of liquidation, and force a dose of reality into the Ponzi scheme that masquerades as domestic football.

The club’s debts were largely unchanged during the fiscal year, but a note to the accounts confirms that certain directors agreed to provide additional short-term funding (to the tune so far of £3.1million).

There was however a small £0.5million Football League loan, on an interest-free basis. Nice terms if you can get them.

The directors who participated in the £14million convertible bond issue (Messrs. Murray, Chappell and Hatter accounted for 70% of it) from the prior fiscal year, generously waived their right to the interest payment on their securities. However it again emphasises the perilous state of the club’s cashflows.

The notes to the accounts reminded us that this convertible bond issue is both redeemable by the club at any time, and convertible by the bondholder into equity following a change of control.

Once again both of these aspects suggest that this was only intended as a short-term ‘bridge’ financing until new owners can be found. The fact that the global financial crisis blew up since is a vital and worrying observation, because it materially reduces the prospect of this occurring.

The main non-director provided debt remains bank loans, of which £4.8million was outstanding at fiscal year-end. Approximately a third of these are repayable with the next two years,

Speaking of which, thanks to a net inflow of £3.7million on cash transfer fees (notably including Marcus Bent and Madjid Bougherra), the club actually posted a net cash inflow for the year of nearly £1million.

Of course, with over £30million received in cash for transfers during the prior two years, the saleable playing squad assets are now somewhat limited going forward, hence the need in my view for the aforementioned additional short-term director funding to meet cashflow requirements.

As if we didn’t already know it, the accounts emphasise just how vital it is that the club wins promotion back to the Championship at the first attempt.

It is ironic perhaps that I am writing this blog just as the team has fallen out of the automatic promotion places for the first time this season.

Following promotion, attendances may inch back towards 20,000 and whilst we will be a long way from a profitable entity, some suitably stupid or hopelessly optimistic ‘investor’ may be tempted to get involved.

Without it, administration must be a very realistic prospect which will surely put any subsequent promotion back by at least one season (as Southampton have discovered).

However in the meantime, at least the Board hasn’t completely lost its sense of humour, even if they appeared rather miserable when I rubbed shoulders with them at Brentford.

As page 5. drily notes, ”The directors do not recommend the payment of a dividend.”


At 5:56 AM, Blogger Wyn Grant said...

An excellent analyis, but also it is difficult to see any way out, although if Notts County can attract further investment from a Norwegian telecommunications company!

At 7:16 AM, Anonymous Anonymous said...

I wonder what the value of a promotion to the Championship is in cash terms. As you surmise, around 4000 on the gate (£1.6m over the season?), a proportionate increase in merchandise and sponsorhip income, and more TV revenue. £3m in total?

Then you increase your wage bill to reward the palying squad you want to retain and entice new faces for a more difficult campaign.

Not sure I want to think this through ...

Pembury Addick

At 8:19 AM, Anonymous Anonymous said...

I don't pretend to understand all this, i just know we're broke.
We certainly need promotion, even if the net financial gain is small.
Of course if we were capable of a 'cup-run' we may have got one of the 'big-boys' and gone out with a finacial bang.
Though, as you and i say promotion is the most important target.

At 8:40 AM, Blogger Hungry Ted said...

Top analysis of a dark subject. I've been waiting for some time for someone to explain the finances of our club (to an extent to which I understand!!): thank you for doing so. I'm not great with such subjects. Sadly, without the arrival of a 'Fat Cow' to throw money in to the club, I don't see any particularly bright light at the end of the tunnel. Now I ask you to do a piece giving us hope....go on, I dare you!!!!

At 8:54 AM, Blogger Dave said...

There's a large queue of clubs in front of us who are threatening to go out of business. I guess the really worrying thing is that most of these are in trouble to the tune of several hundred thousand pounds or the low millions which offers the prospect of a salvation from what you would call a "stupid" or "hopelessly optimistic" individual. Our real problem is that the size of our debts preclude this and we are really look for a business benefactor looking to raise their profile; not something the economy of the world is anywhere near supporting at the moment. If we don't get promoted this season there has to be a player and staff cull to slash costs.

At 10:33 AM, Anonymous Anonymous said...

What a great resource!

At 3:43 AM, Anonymous Anonymous said...



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